Insights / Guide
Asset sale or share sale: which one is right for you?
In short
There are two ways to sell a business. In an asset sale, the buyer picks the assets it wants and you keep the company. In a share sale (called a stock sale in the US), the buyer buys the company itself, with everything in it. Buyers usually prefer the first, sellers the second, mainly for tax and liability reasons. Which one is right depends on your business, and much of the difference can be negotiated in the purchase agreement.
There are generally two ways to sell your business: an asset sale or a share sale. Each comes with key considerations to keep in mind as you prepare for an exit. Here are the main differences, and the pros and cons of each.
What is an asset sale?
Think of your company as a home. An asset sale is like the most thorough garage sale you can imagine. The buyer comes in and takes everything from your microwave to your baby pictures. You keep the empty shell of the house, plus an assortment of unwanted items like old newspapers and creepy clown wallpaper.
In an asset sale, the buyer purchases most (if not all) of the assets that belong to your company, while you keep the legal entity itself. An asset sale is really a bundle of individual sales of your company's assets, tangible and intangible. Tangible assets are the parts of your business you can touch: inventory, computers, buildings, vehicles, machinery and equipment. Intangible assets include contracts, goodwill, patents, social media accounts and customer lists.
By definition, the buyer isn't buying your entire company, just the pieces it wants. So you and the buyer will need to agree exactly what is being sold, and what you're left with.
What is a share sale?
If we still think of your company as a home, in a share sale the buyer buys the title to the house and keeps everything inside, wallpaper included.
Asset sale
You keep the house
The buyer takes
Share sale
You hand over the keys
The buyer takes the house
In a share sale, the buyer purchases the shareholders' stake in the company, and with it the company and everything it owns. There's no need for separate sales of each asset, which makes a share sale much cleaner than an asset sale. As we'll see, it can also be more complex.
The assets it chooses
The whole company
Stay with your company
Go with the company, covered by your warranties
Transferred one by one
Stay in place, unless they have change-of-control clauses
Lighter
Deeper, and often longer
Often taxed twice
Usually taxed once
Buyers
Sellers
Whichever structure you choose, deals are usually priced "cash-free, debt-free": you keep the cash and pay off the debt. The price also typically assumes a normal level of working capital (receivables, inventory and payables) is left in the business.
Asset sale or share sale: what's best for you?
Buyers tend to prefer asset sales, for two main reasons: they bring significant tax advantages for the buyer, and they significantly reduce the buyer's potential legal liabilities.
Sellers typically prefer share sales, for the same two reasons: better tax treatment, and fewer liabilities left behind.
But it would be an oversimplification to say asset sales are always better for buyers and share sales always better for sellers. Several other factors decide the best structure for both sides on a specific deal, and they need to be weighed against the complexity each structure adds to the transaction.
Tax. One of the most important factors is what your eventual tax bill will look like. Your business's legal structure has a lot to do with the exact amount, but asset sales typically create higher tax bills for sellers than share sales. More on this at the end of the article.
Liabilities. An asset sale lets the buyer leave behind any outstanding legal claims or possible future litigation, with the seller, who still owns the company. Any lingering issues, contract disputes, product warranty claims or employment litigation remain the seller's responsibility.
Due diligence. In a share sale, the buyer is likely to run longer and more exhaustive due diligence, to make sure every part of your company passes scrutiny. That can make your exit longer and more complicated. There's also a risk that the buyer walks away over an issue buried deep in your company that wouldn't have come up in an asset sale.
Contracts and licences. Other parts of a business can make one structure preferable. If your business relies on exclusive contracts, licensing agreements or assets that can't easily be transferred, a buyer may actually prefer a share sale, to avoid the headache of transferring them.
Much of it can be negotiated
You can offset many of these issues in the final purchase agreement. If a buyer insists on an asset sale and you know it means a higher tax bill, you can ask for a higher price. In an asset sale, you can also negotiate for the buyer to take on specific obligations, such as certain contracts. In a share sale, the buyer will usually ask for warranties and indemnities covering the time you owned the company, and negotiating limits on them, in amount and in time, reduces your exposure.
What's critical is knowing which issues you want to address before you enter negotiations with a buyer. Working with an experienced M&A advisor helps you do just that.
More about tax
Tax is one of the biggest differences between the two structures, so it's worth a closer look. The exact rules depend on your country and your company's legal form, but the mechanics are similar in many places.
In an asset sale, the money goes to your company, not to you. The company is typically taxed on the gain from selling its assets, and you're taxed again when you take the proceeds out of the company. In the United States, for example, that's the case for a C-corporation. Some company forms avoid the double tax, but part of the gain may then be taxed at higher income rates rather than the lower rates that often apply to the sale of shares.
In a share sale, you sell your shares directly, so the proceeds come straight to you and are usually taxed once, often at capital gains rates.
Why buyers like asset sales. In an asset sale, every asset the buyer buys is valued at the price paid on the day of the acquisition, and the buyer can start depreciating it again from that new value. That lowers the buyer's future tax bill. A buyer doesn't get the same benefit when it buys shares.
Tip
Tax strategy matters a lot in a sale. Talk to a qualified tax adviser or accountant in your country early, to make sure the structure you choose fits your business and your tax situation.
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Last updated December 2023 · Written by Aïda Aït-Ahmed, Co-Founder, Nextoria